Why The Burj Khalifa Doesn't Matter

The world's tallest building, a soaring steel and glass spindle nearly double the size of Chicago's Willis Tower, was officially opened in Dubai Monday to majestic light shows and an outsized ceremony. Its proponents hope the grandeur of the Burj Khalifa--as it was recently renamed, for the Abu Dhabi president who's financial bailout saved Dubai late last year--will make stakeholders forget the Gulf state's crushing debt crisis. Detractors warn that the skyscraper will be a spectacular financial failure.

But in all likelihood, the mammoth structure will scarcely affect the region's long-term economy in any way. It's a PR boost, for sure, but Dubai's economic and real estate problems are bigger than a neighborhood revitalization--no matter how high-profile.

Certainly, from 2,716 feet, things currently look very bleak in Dubai real estate. Apartment prices in the Burj, owned by the developer Emaar Properties, have fallen by nearly half from the $2,700 per square foot that they fetched at their 2008 peak. Analysts also suspect that investor debt will sour.

"The average price is probably going down to $500-$600 per square foot. With that kind of market compression, we should be expecting high defaults," says Saud Masud, a Dubai-based senior real estate analyst for UBS AG.

While major property investors including London-based Enstar Capital have fled Dubai in anticipation of a total financial collapse, Emaar and the Government of Dubai are counting on speculators to take stakes in the Burj now, in anticipation of a market rebound. Such buyers would have a five- to 10-year outlook, says Liam Bailey, head of residential research at Knight Frank, an international property services company.

"They are taking the view that as the world grows and picks itself up from the recession that this is the kind of property that will make a decent return," Bailey says. "They're buying at a 50% discount from peak prices, but no one is going to know if that's the right call to make for at least one or two years."

The Burj is designed to attract attention for a long time to come. A Georgio Armani hotel is housed at its base, to go along with its 1,000 residential units and 37 floors of offices.

"The goal of project is to be more than just the tallest building in the world," says James Pawlikowski, associate director at Chicago-based architecture firm Skidmore, Owings & Merrill LLP and senior structural engineer on the building's construction. "It's not just the height; it's the quality of the spaces created, and the quality of finishes. We're trying to be really an iconic building."

Fifty more nearby residential towers are envisioned, along with a low-rise residential development, the world's largest marina, the world's largest mall and the world's largest fountain. Unfortunately, none of this translates to an effect--positive or negative--on the local economy. That's even taking into consideration the current recession and Dubai's current debt problems.

"Dubai house prices are down 50%, and I still think there will be at least a 30% downslide from where we are today. The Burj being done doesn't fix the economy, obviously," says Masud. "It's a completion, a landmark, a good thing. I applaud the achievement and can't take that away from them, but fundamentally this project completion is a non-event."

In other words, Dubai's fortunes rest on much more than the fate of a single property, no matter how tall. The Burj alone can't provide Dubai real estate with an economic boost--nor will it spell its doom.

"The oversupply issue is enormous. By the end of the year we estimate that Dubai may experience 30% of residential vacancy. If you extrapolate what's in the pipeline, that number could reach 50% in a couple of years or so," says Masud. "But the Burj is only 1,000 units. It doesn't really help, and its failure doesn't really hurt--we are dealing with perception issues more than anything else."